NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives
A stock trades at Rs 400 in the spot market. The risk-free rate is 9% per annum with continuous compounding, ignoring dividends. Using F = S × e^(rT), what is the approximate fair price of a futures contract expiring in 3 months? (Take e^0.0225 = 1.0228)
The fair futures price is about Rs 409.12. With continuous compounding, F equals spot times e raised to rT, where rT is 9% times 0.25, or 0.0225. Multiplying Rs 400 by 1.0228 gives Rs 409.12, reflecting the cost of carry for three months.
- ARs 409.12Correct
- BRs 436.00
- CRs 400.00
- DRs 390.88
Explanation
T = 3/12 = 0.25, so rT = 0.09 × 0.25 = 0.0225. F = 400 × 1.0228 = 409.12. Using 9% for a full year (436) ignores the time fraction; Rs 390.88 wrongly subtracts the carry cost.
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